Results

2Q13 core PAT rose 167% yoy to RM66.7m, while 1H net profit of RM115m made up 99% and 77% of HLIB and consensus estimates respectively.

Deviations

We believe the deviation was due to strong takeup for completed apartment units at KSL City in Johor Bahru as well as stronger than expected performance of the mall and hotel segments; we have no guidance from management in this respect.

Dividends

None.

Highlights

Yoy: KSL’s PAT rose 167% yoy, mainly driven by the higher take up rate and progress billing for its flagship projects, mainly KSL City in Johor Bahru, as well as earnings contribution from its hotel operations in KSL City. Revenue generated from the mall operation also formed a major part of the increase.

Qoq: PAT rose 39% qoq, with management attributing it to: (1) Positive change in sales mix and percentage of completion of the existing main on-going and completed mixed development projects in Johor Bahru; and (2) Earnings contribution from hotel operations in KSL City, which rose 135% qoq.

No dividends declared… Management continues to limit payout to shareholders, we believe in an effort to preserve funds for (1) working capital needs for its flagship RM2bn development in Klang, and (2) potential land acquisitions, as its relatively clean balance sheet (only 0.12x net gearing) offers it close to RM680m of gearing headroom before net gearing hits 0.5x. Therefore, we maintain our forecast of zero dividends going forward.

Risks

Execution and demand risk for Bandar Bestari, as the group's future earnings will be highly reliant on this flagship project; an overall downturn in the property sector.

Forecasts

FY13-15E forecast raised by 100-115% to factor in: (1) Stronger earnings flow through from KSL City; (2) Stronger recurring income from mall and hotel operations.

Rating

HOLD

Positives: (1) Good proxy to IDR growth story; (2) new expansion to Klang Valley; and (3) growth in recurring investment income.

Negatives: Lack of liquidity; project concentration risk.

Valuation

Given the prevailing macro and sector headwinds, we now increase discount to RNAV from 20% to 40% and reduce TP from RM2.73 to RM2.04. Downgrade to HOLD

Source: Hong Leong Investment Bank Research - 29 Aug 2013